Here’s a media merger going badly.
Earlier this year Australia’s two biggest printing companies, the publicly listed PMP and the privately-owned IPMG (by Sydney’s wealthy Hannan family) merged after 15 years of trying in a $120 million deal. PMP paid with shares that saw which saw the Hannan interests end up with 37% of the new company’s shares and two board seats on the bigger group.
The merged company prints most magazines in Australia (in competition with Sydney’s IVE Group), prints newspapers, and billions of catalogues and flyers for retailers and other companies. Its Gordon & Gotch is the biggest magazine distributor in the country. While magazine sales and revenues are sliding, PMP remains a vital part of the sector.
When the newly merged company produced its 2017 full year figures in August, it revealed $126 million in net losses after write downs and impairments of $142 million mostly linked to the costs of the merger. CEO Peter George was confident that was a one off:
“Fiscal 2017 was both challenging and rewarding, marked by print industry consolidation and the completion of the merger with IPMG,” said George. “I am pleased to report that our transformation program has run smoothly and on schedule. We end the year with the press fleet rationalization complete, a new optimized national manufacturing footprint and $40m of annualized cost savings actioned within four months of the merger. Further reductions in indirect costs, including procurement are already well underway to deliver net $55m of synergies by fiscal 2019,” he said.
He also said PMP was now on track to deliver earnings before tax of $70 million-$75 million in FY18 and $90 million-$100 million in FY19, with the company also set to be debt free in fiscal 2019. No longer because on Monday PMP abandoned those forecasts, sending the shares down 30% and near all time lows. Instead PMP has slashed its earnings estimates by 20% and more – the new pre-significant items forecast for profit for 2017-18 is now $50 to $55 million and for 2018-19, the new forecast s $70 million to $80 million.
Instead of having no net debt by 2019, it will have between $5 million and $15 million. Net debt at the moment is around $60 million and should halve by June 30 2018. But more important to the warning is the big shortfall on cost cuts (misleadingly called ‘synergies’ which are used to finance takeovers and mergers).
In the case of PMP, the estimate was $55 million. In the end the figure was $43 million and from now on a figure of $43.5 million will become the cost cut estimate over the next two years. But PMP said that to get that $43.5 million in cost synergies will cost “an additional $29 million” in 2018 and 2019, so many of these cuts are pea and thimble tricks.
The shares fell 30% on Monday to 53.5 cents, wiping $82 million the company’s market value. They lost another 5.6% yesterday to 50.5 cents.
The reason for the shortfall of $12 million was simple – the workflow at PMP’s printing plants changed as clients demanded more short term contracts than longer term arrangements. Short term deals are more labour intensive (more printers and others have to be employed) meaning the cost cuts (sorry, synergies) could not be realised as promised.
That was a serious mistake because it show management and the board misread the needs of its clients (who would have been worried about the impact of the merger on their deals). And PMP also revealed in its statement that CEO Peter George was accelerating his planned retirement stepping down immediately because of “a tragic family bereavement”, as Monday’s statement put it.
